Temporary power specialist APR Energy (APR) came to the market in 2011 with a punchy valuation and ambitious plans for rapid growth. The shares rose rapidly after the September 2011 flotation and at its peak the company was valued at over £800m. But then APR stumbled; first came a late set of accounts, followed by the exit of the chief financial officer, and finally a profit warning. The shares plummeted, wiping out over a third of the value of the company, and they have marked time since then. We think investors would do well to reduce their holdings in APR Energy further ahead of what looks like another tough year.
- Strong start to 2013
- Gas turbines fully utilised
- Slowing growth
- Tightening margins
- Investment spending cut
- Contract wins are unpredictable
APR Energy itself has breezily reported a "strong start to 2013" with contract wins in Guatemala for 16 megawatts (MW) and Indonesia for 15MW, as well as 70MW of contract extensions in Senegal and Gabon. This is in stark contrast to sector peer Aggreko, which recently highlighted limited opportunities in international business and predicted that the loss of one-off events such as the Olympics would cut revenues by around £100m this year.
Analysts at broker Peel Hunt estimate that to hit full-year targets APR needs 600MW of new orders. Contract wins in this business are typically very lumpy: business goes quiet, then suddenly a big new order rolls in, such as the 200MW contract in Uruguay announced on 17 December. This contract runs to mid-2014 and, combined with 100MW of renewals, gives revenue visibility over 23 per cent of the fleet. But Peel Hunt suspects the contract was been keenly priced, given its size and competitive market conditions
There are other signs that cooling global growth is being felt in the temporary power market. In 2012 APR Energy spent over $300m (£190m) investing in the expansion of its generating fleet, but this year is planning only $150m of investment to extend its gas turbine fleet. This looks like a sensible move - APR currently has all its dual-fuel gas turbines deployed, and they tend to command higher margins.
APR ENERGY (APR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 700p | MARKET VALUE: | £547m | |
| TOUCH: | 700-704p | 12-MONTH HIGH: | 1,127p | LOW: 570p |
| DIVIDEND YIELD: | 2.1% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 1,408ȼ | NET DEBT: | 17% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (ȼ) | Dividend per share (ȼ) |
|---|---|---|---|---|
| 2010^ | nil | -6.0 | -14.9 | nil |
| 2011# | 165 | -33.0 | -71.0 | 10.0 |
| 2012* | 272 | 60.0 | 64.5 | 19.3 |
| 2013* | 359 | 70.0 | 72.6 | 23.3 |
| % change | +32 | +17 | +13 | +21 |
Normal market size: 300 Matched bargain trading Beta: 0.4 *Peel Hunt estimates (not comparable with prior years) ^12 months to Oct 31 #14-month period £1=$1.577 | ||||
The problem is with the diesel turbines, an older technology. Peel Hunt estimates that diesel generators made up around 60 per cent of the fleet at the end of 2012. More worrying is that the broker reckons around 200MW, or 15 per cent of the current fleet, was 'off-hire' or sitting idle. This is not a cause for concern just yet, because a fleet utilisation rate of 80-85 per cent is very respectable. The problem comes if work is slow in coming through or margins bleed as work is chased. APR itself hinted at the problem when it said one of its focuses for 2013 would be increasing utilisation of the diesel fleet.
There are other signs of slowing growth. Revenue in the fourth quarter of 2012 was $57m, down 39 per cent on the prior year. Moreover, the current order backlog of 11,592MW-months, while 80 per cent up on the end of 2011, remains 583MW lower than in December. Applying the current fleet size, the order book provides revenue visibility of around 38 weeks.
There is always a risk of straining cash when companies embark on rapid expansion plans. APR started 2012 with no debt, and cash of $63m. Last month, APR had $21m of cash and debt of $205m on the balance sheet, giving net debt of $184m. The issue here is not so much in the absolute levels as the movement. APR still has plenty of headroom on its $400m facility, but we'd like to see growth funded by cash rather than debt.
